Don't Call This Retail Winner Expensive

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: lululemon athletica (Nasdaq: LULU  ) . Is this upscale retailer of women's athletic apparel the real thing? Let's get right to the numbers.

Foolish facts

Metric

lululemon athletica

CAPS stars (out of 5) *
Total ratings 621
Percent bulls 70.9%
Percent bears 29.1%
Bullish pitches 74 out of 113
Highest rated peers V.F. Corp., Coach, Polo Ralph Lauren

Data current as of Oct. 20.

Most investors seem to think lululemon is priced for crazy, and they may be right. The stock trades for 39 times trailing normalized earnings and 36 times next year's consensus estimate. But is that enough to keep from owning what appears to be a great business? Not all Fools agree.

"The only thing that I can knock this company for is the current price. That's it. Yeah, it's higher than I'd like it to be, but clearly a lot of other people are either totally insane (in this market, NOT impossible), or there's something more,"  Foolish investor RidgebackHero wrote last month.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth 124.0% 40.9% 17.5%
Revenue growth 52.2% 28.1% 30.9%
Gross margin 52.8% 49.3% 50.7%
Receivables growth (8.4%) 104.5% (6.4%)
Shares outstanding 70.9 million 70.5 million 69.9 million

Source: Capital IQ, a division of Standard & Poor's.

Put me in the "there's something more" camp. The numbers in this table are just too delicious to resist. Let's review:

  • First, normalized net income isn't just growing, it's growing at an accelerated pace. Growth like that is often worth paying for.
  • Revenue growth mostly follows the same pattern, and tends to rise faster than receivables. Revenue growth has also outpaced inventory growth in each of the last two years. This is awesome performance in a critical area; no retailer wants to be left holding unwanted inventory.
  • Rising gross margin indicates lululemon's premium pricing strategy remains intact, another good sign.
  • And finally, shares outstanding have kept stable as existing cash flow continues to fund operations. (Lululemon produced $102 million in free cash flow over the trailing 12 months.)

Competitor and peer checkup

Company

Normalized Net Income Growth (3 years)

bebe stores (Nasdaq: BEBE  ) Not measurable
Finish Line (Nasdaq: FINL  ) 28.3%
lululemon athletica 60.8%
Nike (NYSE: NKE  ) 4.6%
Under Armour (NYSE: UA  ) 10.9%

Source: Capital IQ, a division of Standard & Poor's. Data current as of Oct. 20.

No competitor gets close to lululemon in terms of historical growth, and with analysts now estimating the company will improve earnings by 26% annually for the foreseeable future, it's doubtful they'll gain ground soon.

Grade: Sustainable
Lululemon has the look of a Rule Breaker in the making. It possesses a definable niche (i.e., chic athletic gear for active moms), pricing power, strong cash flow, and has no need to dilute existing investors. Only the price is scary, but not frightening enough to keep me from rating the stock to outperform in my CAPS portfolio.

Now it's your turn to weigh in. Do you like lululemon athletica at these levels? Let the debate begin in the comments box below. You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

Interested in more info on lululemon athletica? Add it to your watchlist here by clicking here.

Coach and Nike are Motley Fool Stock Advisor selections. Both our Motley Fool Hidden Gems and Motley Fool Rule Breakers services have recommended subscribers buy shares of Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of Coach and is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.


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